Market volatility, debt & the commodities slide.
October 21st, 2011 · Greg Atkinson · 35 Comments
Over the last six months stock markets globally have become more volatile as Europe and the U.S. struggle to revive their economies. To make things more complicated many advanced economies have racked up so much debt during the ‘good times’ that they now don’t have the capacity to spend their way out of trouble. There will be no quick fixes and the situation is worrying enough to even rattle the commodities bulls.
Rather than focus on the daily movements of the markets I prefer to look at the bigger picture to see if I can pick out some themes or trends that might help make some sense out of all this chaos.
So let’s firstly look at the U.S. S&P 500 Volatility Index or VIX.
S&P 500 Volatility Index chart (VIX)
Over the last six months the VIX has risen from around 15 to around 35 and most of this gain has been since late July. We can’t just blame the Europeans and their debt mess for this as the U.S. economy isn’t exactly in good shape either.
The VIX chart is telling us what we already know – that the U.S. stock market has been posting some decent gains only to have these wiped out by some pretty nerve testing slumps.
Generally speaking, long term stock market investors like to see the markets a lot more calmer than they are now and in VIX terms, that would be around 15 or lower. But remember, the VIX tracks volatility and so it can be quite low even during a bear market. A less volatile market doesn’t necessarily mean that stock prices are rising.
Possibly more worrying for Australian stock market investors is that commodities prices have been on the decline now for some months. Various mining company CEO’s have been doing their best to convey a bullish outlook for commodities like coking coal and iron ore, but the reality is that the overall price trend for these at the moment is downwards.
Commodities Futures Indexes
The chart above shows a variety of commodities related indexes such as the UBS Bloomberg CMCI (red) and the Rogers International (blue) but it is really the overall trend I am interested in. Despite a recent bounce off a low, the commodities futures are trending down.
Maybe commodities are about to stage a rally and recover lost ground but I doubt it. My personal (and probably flawed) view is that the commodities cycle is turning and that prices will head lower and remain below their records highs for some years.
As regular site visitors will know, I have been warning for some time that commodities prices would fall back and not merrily keep heading towards the stratosphere as many people appear to believe. Many in the financial media would scoff at that idea but if we look at the stock price chart for BHP Billiton then it appears that many investors share my view…at least for now.
BHP Billiton (ASX:BHP) 6 month stock price chart
Back in April, BHP shares traded just below $50. Today BHP stock is trading around $35 so that suggests to me that many investors are have indeed become cautious about the outlook for commodities.
If you are bullish on the outlook for Chinese economy or regarding commodities in general then BHP is probably trading at fairly attractive price. My view is that there is simply far too much risk out there and at this point in time I am comfortable with being underweight in the commodities area.
Lastly a quick review of the ASX 200 will show us how the Australian stock market has fared over the last six months.
S&P/ASX 200 Index (ASX:XJO) 6 month chart
Since May it’s been a somewhat bumpy ride down to what appears to have been a market bottom of just below 4000. If France & Germany can work out their differences regarding a bailout fund then we should see the S&P/ASX 200 head up near 4400. But we need to keep in mind that economic growth in Europe is at best anaemic and that the U.S. economy is on the brink of dipping back into a recession.
Overall I remain very cautious regarding the outlook for the global economy and believe it is going to be a tough year for the Australian economy in 2012. At some point we should see the market start to rally again, but I don’t think we are near that stage quite yet.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jpSearch terms: share market outlook 2012 australia, outlook for australian shares 2012, asx200 graph, shares to buy 2012, baltic dry index forecast 2012, australian sharemarket outlook 2012